[3] Because of the 1986 reform, in general, construction businesses do not use the cash method of accounting.
Under the modified cash method of accounting, most income and expenses are determined under cash receipts and disbursements, but purchases of equipment and items whose benefit will cover more than one year is to be capitalized, whereas such items as depreciation and amortization are charged to cost.
[5] There are certain advantages in tax planning when the cash method of accounting is used: for instance, payment of business expenses may be accelerated before year end, in order to maximize tax deductions, whereas billings for services may be postponed to after year end, so that payments won't be received until the new year, thus postponing tax payments on such income.
[4] Because of these advantages and the manipulations that can occur with it in order to minimize taxable income, the IRS has discouraged (although not prohibited entirely) the cash basis of accounting for tax purposes.
For instance, companies that use the cash basis of accounting may not report any inventory in their financial statements, in fact reporting of any inventory at year end can lead to manipulation of taxable income to an enormous extent.